As of April 1,September 30, 2016, options exercisable and options outstanding had a weighted average remaining contractual term of 4.194.59 and 5.595.99 years, respectively, and had an aggregate intrinsic value of $467$936 and $604,$1,273, respectively.

The Black-Scholes option-pricing model is used to estimate the fair value of options under the Company's stock option plan. The weighted average values of employee stock options granted under the stock option plan, as well as the weighted average assumptions used in calculating these values during the first threenine months of 2016, were based on estimates as of the date of grant as follows:

 

Expected option life and volatility are based on historical data of the Company.   The risk-free interest rate is calculated based on the average US Treasury bill rate that corresponds with the option life.  Historically, the Company has not declared dividends and there are no foreseeable plans to do so.

As of April 1,September 30, 2016, there was approximately $161$189 of total unrecognized share-based compensation cost related to grants under the stock option plan that will be recognized over a weighted-average period of 2.53.87 years.

Share-based compensation expense included in selling, general and administrative expense in the statements of comprehensive income (loss) for each of the nine-month periods ended September 30, 2016 and October 2, 2015 was $125 and $30, respectively.  Share-based compensation expense included in selling, general and administrative expense in the statements of comprehensive income (loss) for each of the three-month periods ended April 1,September 30, 2016 and April 3,October 2, 2015 was $25$52 and $9,$10, respectively.

 

On April 21, 2015, the Company entered into a series of agreements to terminate its defined pension plan (the "Pension Plan") and settle the resulting liabilities. Pursuant to the agreements, as of April 1,September 30, 2016, the Company is obligated to pay eleven remaining installments of $750 to the Pension Benefit Guaranty Corporation (the "PBGC") due annually on October 31 of each year from 2016 through 2026 (the "Pension Settlement Obligation"). As security for the Pension Settlement Obligation, the Company granted to the PBGC a security interest on all of the Company's assets, subordinate to certain senior liens held by the Company's two senior lenders. The Pension Settlement Obligation is recorded net of imputed interest expense at 7%, as a liability on the balance sheet.

The Company recorded pension expense of $326 attributable to the Pension Plan for the first quarter of 2015, which was prior to the April 2015 plan termination. As a result of the termination Pension Plan, the Company's only remaining pension obligation is the Supplemental Executive Retirement Plan ("SERP").

The Company is not currently required to fund the SERP.  All benefit payments are made by the Company directly to those who receive benefits from the SERP.  As such, these payments are treated as both contributions and benefits paid for reporting purposes. The Company expects to contribute and pay SERP benefits of approximately $500$551 in the next 12 months.

 

For the three-monthnine-month period ended April 3,October 2, 2015, the Company reclassified $195 of actuarial loss from accumulated other comprehensive loss related to the Pension Plan whichthat was included in pension expense in the statements of comprehensive income.loss for the same period.

The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes of Evans & Sutherland Computer Corporation and subsidiaries (collectively, the "Company,"  "E&S," "we," "us" and "our") included in Item 1 of Part I of this quarterly report on Form 10-Q.  In addition to the historical information contained herein, this quarterly report on Form 10-Q includes certain "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by the fact they use words such as "should," "expect," "anticipate," "estimate," "target," "may," "project," "guidance," "intend," "plan," "believe" and other words and terms of similar meaning and expression in connection with any discussion of future operating or financial performance. One can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements are based on current expectations and involve inherent risks and uncertainties, including factors that could delay, divert or change any of them, and could cause actual outcomes to differ materially from current expectations. These statements are likely to relate to, among other things, the Company's goals, plans and projections regarding its financial position, results of operations, cash flows, market position, product development, sales efforts, expenses, performance or results of current and anticipated products and the outcome of contingencies such as legal proceedings and financial results, which are based on current expectations that involve inherent risks and uncertainties, including internal or external factors that could delay, divert or change any of them in the next several years.

TheSales for third quarter of 2016 improved compared to the third quarter of 2015, while the sales for the first threenine months of 2016 produced slightlywere lower sales but improved net income compared tothan the samecomparable period of 2015. WeakerThe lower sales for the nine month period in 2016 gross profit margins were more than offset by lowerdue to unusually low sales in the second quarter of 2016. The variation in sales volume in the periods presented was attributable to the timing of customer deliveries of planetarium systems and work completed on a theme park attraction.  Operating expenses in the third quarter of 2016 operating expensesincreased due to accrued severance costs related to changes in our management team.  As a result we reported $561 of net income in the third quarter of 2016 compared to $921 of net income in the third quarter of 2015.  The 2016 weaker gross profit margins were duethird quarter net income reduced the net loss reported in the first half of the year to variability in product mix within a normal range. Operating expenses were lower innet loss of $172 for the first nine months of 2016. The loss for the nine months ended 2016 dueis an improvement to the cessationnet loss of expenses$1,676 for the comparable period of 2015. The 2016 third quarter included $600 of expense related to accrued severance costs and related legal fees resulting from changes in our management team, while 2015 included a second quarter non-recurring charge of $3,620 for the Pension Plan which was terminatedpension settlement.  We do not expect any additional severance-related expenses in April 2015.the foreseeable future.  The revenuevariable results, other than the severance costs and pension settlement described above, are within the range expected for the nature of our business. The sales backlog decreased but remained relatively healthy at April 1, 2016. The decrease in the revenue backlog was attributable to a low volumeend of new sales bookings due mostly to the timingthird quarter of prospective customer decisions. The April 1, 2016 revenue backlog and a strong sales prospect list supportwhich supports an encouraging outlook for the remainder of 2016. The first quarter 2016 resultsand into 2017. With the healthy backlog and sales prospects, we anticipate sales at levels that should continue to illustrateproduce profitable results for the profit potentialremainder of 2016.

The net income for the third quarter of 2016 was not sufficient to completely eliminate our business withoutstockholders' deficit.  We expect continued progress with profitable results to eliminate the burdendeficit toward our goal of building shareholder value. For the Pension Plan.

Certain accounting policies are considered by management to be critical to an understanding of our condensed consolidated financial statements.  Their application requires significant management judgment, with financial reporting results relying on estimates about the effect of matters that are inherently uncertain.  A summary of critical accounting policies can be found in our Form 10-K for the year ended December 31, 2015.  For all of these policies, management cautions that future results rarely develop exactly as forecasted, and the best estimates routinely require modification.

Sales and Backlog

The following table summarizes our sales:

Sales for the firstthird quarter of 2016 were slightly lowerhigher than the same period in 2015 while the sales for the first nine months of 2016 were lower than the same periods in 2015. The lower 2016variations in sales between the periods presented were attributable to timing of deliveries and work completed on customer contracts.

Revenue backlog declined to $22,293was $23,288 as of April 1,September 30, 2016, compared to $26,298 as of December 31, 2015. The decline in the revenue backlog is attributed to a low volume of new orders booked in the first three monthsquarter of 2016.2016, which was partially offset by a higher volume of new orders booked in the second and third quarters. Sales prospects support the outlook for a higherstrong volume of new orders through the remainder of 2016.2016 and into 2017.

The following table summarizes our gross profit and the gross profit as a percentage of total sales:

  

Operating Expenses

The following table summarizes our operating expenses:

Other Expense, net

The following table summarizes our other expense:

OtherFor the three months ended September 30, 2016, other expense, increasednet, was less than the same period in 2015 due to lower losses from foreign currency transactions.  For the nine  months ended September 30, 2016, other expense, net, was more than the same period in 2015 due to nine months of interest expense on the pension settlement obligation in 2016 compared to five months in 2015 due tobeginning in April 2015. The higher 2016 interest expense was partially offset by the lower losses from foreign currency transactions.

Other Comprehensive Income (Loss) and the imputed interest onSettlement of Pension Plan Liabilities

The settlement of Pension Plan liabilities resulted in a charge to the Pension Settlement Obligation,statement of operations of $3,620 which was offset by other comprehensive income of $31,776 for a liabilitytotal gain of $28,156 in the second quarter of 2015.  The other pension related charges in 2015 recorded in Aprilother comprehensive income were attributable to the accounting for actuarial valuations of the pension liabilities. Other comprehensive income (loss) in future years is expected to be limited to accounting for potential changes in the actuarial valuation of the SERP liabilities for much less significant amounts than 2015.

Liquidity and Capital Resources

Outlook

Cash Flows

In the first threenine months of 2016, $1,645the $2,116 of cash provided by operating activities was attributable to $415$426 of cash providedabsorbed by the net incomeloss for the period, after the effect of $179$598 of non-cash items plus a favorable changeand an increase in cash from changes to working capital of $1,230.$1,690.  The change to working capital was driven bychanges contributing to the timing of progress payments from customer contracts, a decrease in inventory attributable to customer deliveries, an increase in accounts payable attributable to the timingcash consisted primarily of purchases, and an increase in accrued expenses attributable to severance compensation and payroll schedules.schedules plus increased progress payments from customer contracts.

In the first threenine months of 2015, $2,652$3,151 of cash used in operating activities was attributable to $398$2,503 of cash from the net incomeloss for the period, after the effect of $295$4,179 of non-cash items, plusmostly related to the pension settlement, less an unfavorable change to working capital of $3,050.$5,654. The cash effect of the change to working capital was driven primarily by increases in inventory and receivables, attributable to the timing of billingscustomer progress payments, payment on the pension settlement obligation and, newto a lesser degree, the acquisition of inventory for upcoming customer orders.deliveries.

Cash used in investing activities was $22$145 for the first threenine months ended April 1,September 30, 2016 compared to $14$71 for the same period of 2015.  Investing activities for both periods presented consisted entirely of property and equipment purchases.

For the first threenine months ended April 1,September 30, 2016, financing activities used $65$148 of cash compared to $62$156 during the same period in 2015 for principal payments on mortgage notes.

Line of Credit

The Company is a party to a line-of-credit agreement with a commercial bank which permits borrowings of up to $1,100 to fund the working capital requirements of Spitz.our subsidiary Spitz, Inc. ("Spitz"). Under the line of credit agreement, interest is charged on amounts borrowed at the lender's prime rate less 0.25%.  Any borrowings under the Credit Agreement are secured by Spitz real and personal property and all of the outstanding shares of Spitz common stock. The line-of-credit agreement and mortgage notes (with the same commercial bank) contain cross default provisions whereby a default on either agreement will result in a default on both agreements. There were no borrowings outstanding under the line-of-credit agreement as of April 1,September 30, 2016.

Letters of Credit

Under the terms of financing arrangements for letters of credit, the Company is required to maintain a balance in a specific cash account equal to or greater than the outstanding value of all letters of credit issued, plus other amounts necessary to adequately secure obligations with the financial institutions who issue the letters of credit.  As of April 1,September 30, 2016 there were outstanding letters of credit and bank guarantees of $600, which are scheduled to expire during the year ending December 31, 2016.2017.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the period covered by this report.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective at the reasonable assurance level such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls system cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company are detected.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting identified in connection with the evaluation of disclosure controls and procedures discussed above that occurred during the quarter ended April 1,September 30, 2016, or subsequent to that date, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.

PART II - OTHER INFORMATION

In the normal course of business, we become involved in various legal proceedings.  Although the final outcome of such proceedings cannot be predicted with certainty, we believe the ultimate disposition of any such proceedings will not have a material adverse effect on our consolidated financial position, liquidity, or results of operations.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.